Behr Process Corp. v. Allianz Ins. Co.

Filed 9/29/06 Behr Process Corp. v. Allianz Ins. Co. CA4/3

NOT TO BE PUBLISHED IN OFFICIAL REPORTS

California Rules of Court, rule 977(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 977(b). This opinion has not been certified for publication or ordered published for purposes of rule 977.

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

FOURTH APPELLATE DISTRICT

DIVISION THREE

Appeal from a judgment of the Superior Court of Orange County, David C. Velasquez, Judge. Affirmed.

Heller Ehrman, Paul W. Sugarman, Adam M. Cole, and Warrington S. Parker III for Plaintiff and Appellant.

Craig & Winkelman, Bruce H. Winkelman for Defendants and Respondents Allianz Global Risks U.S. Insurance Company f/k/a Allianz Insurance Company.

Berman & Aiwasian, Alan S. Berman, and Scott M. Dreyer for Defendants and Respondents Westchester Fire Insurance Company, Fremont Industrial Indemnity Company f/k/a Industrial Indemnity Insurance Company.

* * *

Behr Process Corporation manufactures and markets wood treatment products. This case involves Behr’s efforts to obtain insurance coverage from two companies for settlements it paid in two related class action lawsuits. The court determined Behr failed to establish the indemnification provisions were triggered by the class action lawsuits. Behr asserts the court misinterpreted the contract and failed to appreciate the nature of the class actions. We disagree and affirm the judgment.

I

Factual Background

In the late 1990s, Behr was named in numerous lawsuits throughout the United States concerning several of its wood sealants. In 2000, a jury entered judgment against Behr in a Washington State class action (Smith, et al. v. Behr Process Corporation (Wash. Super. Ct., No. 98-2-00635-4), hereafter referred to as the Smith action). Behr settled the Smith action for approximately $55 million while its appeal of the judgment was pending. The trial court’s findings of fact and conclusions of law were vacated. Behr was ordered to pay $12.5 million for attorney fees and approximately $1.3 million for other costs.

Several other class actions were consolidated into a national class action (the Nationwide case) and it settled for approximately $107.5 million before trial. In addition, Behr was ordered to pay $25 million in attorney fees and costs.

Behr carried both primary and excess insurance. At issue in this appeal are the excess policies issued by Westchester Fire Insurance Company^[1] (Westchester) and Allianz Insurance Company^[2] (Allianz). Behr filed an action seeking declaratory relief regarding Westchester’s and Allianz’s duty to indemnify Behr for its class action settlements. Before trial, the parties stipulated to have the court resolve two threshold issues, namely; (1) Did the settled claims arise out of an “‘occurrence’“ as defined in Westchester’s and Allianz’s policies?; and (2) Are attorney fees paid to class counsel “‘damages’” under Behr’s primary policies or covered by the excess policies at issue?

The following is the concise and condensed summary of facts taken from the court’s statement of decision. “The Smith and Nationwide actions were filed against Behr by a class of consumers alleging that two of Behr’s exterior wood sealing products were defective and caused damage to their property. [Citation.] Plaintiffs alleged that Behr ‘designed, produced, manufactured, marketed, advertised and promoted’ its products for sale or use by the class of consumers. Plaintiffs alleged Behr represented and warranted, through advertising and the [p]roducts’ ‘labeling’ [sic] that the products were of ‘premium’ quality and effective against mildew and environmental conditions. However, Behr allegedly breached the ‘express and implied warranties, including merchantability, fitness for its ordinary purpose, and suitability for particular purposes for which the [p]roduct was intended’ by failing to disclose, when Behr knew or should have known, their products were not fit for such purposes. By their conduct, Behr engaged in ‘an unfair or deceptive act or practice in trade or commerce,’ under the State of Washington’s consumer protection act, and caused damages by the misrepresentation. It is alleged that the class of consumers treated their property with Behr’s products. ‘[M]ildew damage [resulted] within months of the [p]roduct’s application.’ (Smith Second Amended Complaint . . . .) It is also alleged that wood treated with Behr’s products ‘becomes discolored and, eventually, turns black with mildew.’ (Nationwide Second Amended Complaint . . . .) The class in the Smith case included those parties who purchased and applied the products from “‘May 29, 1994 to the present.’” [Citation.] The Nationwide class included those parties who purchased and applied the products between ‘January 1, 1991, and the date of entry of [the May 7, 2003, settlement] order.’ [Citation.]”

“During the pertinent periods of time, Behr was insured by its primary carriers, ASLIC, National Union and Zurich insurance companies under commercial general liability policies (‘CGL’). . . . [A]llianz and Westchester are [Behr’s] excess insurers whose insurance obligations are not triggered until the limits of Behr’s primary coverage have been exhausted.”^[3]

The Westchester policy provides, “We will pay those sums that the ‘insured’ becomes legally obligated to pay as damages arising out of an ‘occurrence’ which are in excess of the underlying insurance. . . . This insurance applies only to . . . ‘Property Damage’ . . . which occurs during the policy period. The word ‘occurrence’ is defined in pertinent part as: ‘An accident, including continuous or repeated exposure to substantially the same general harmful conditions that results in “Bodily Injury” or “Property Damage” that is not expected or not intended by the “Insured.”’”

“The policy includes coverage for ‘Property Damage’ included in the ‘Products-completed operations hazard.’” This is defined as, “All . . . ‘Property Damage’ . . . arising out of ‘your product’ or ‘your work’ . . . . ‘Your Product’ means . . . any goods or products . . . manufactured, sold, handled, distributed, or disposed of by . . . you . . . [and] includes warranties or representations made at any time with respect to the fitness, quality, durability or performance of [your product].”

“The Allianz . . . policy differs in pertinent part from the Westchester policy in that it omits reference to either the phrase ‘as damages’ or ‘for damages’ in its insuring agreement. It provides:

We will pay on behalf of the insured those sums in excess of the Retained Limit that the insured become legally obligated to pay by reason of liability imposed by law . . . because of . . . Property Damage . . . that takes place during the Policy Period and is caused by an Occurrence . . . .

Thus, unlike the Westchester policy, the Allianz policy does not limit coverage to amounts that Behr becomes legally obligated to pay as ‘damages.’ Under the Allianz policy, ‘occurrence’ means:

[An] accident, including continuous or repated exposure to conditions, whch results in . . . Property Damage neither expected nor intended from the standpoint of the insured.”

The court concluded the settled claims against Behr in the underlying class action lawsuits were not caused by an “occurrence” as defined in the Westchester or Allianz insurance policies. It reasoned, “Under both . . . policies, only such sums which Behr is legally obligated to pay by reason of liability imposed by law because of property damage caused by an ‘occurrence’ are covered. [Behr] has not carried its burden of persuasion to prove that the damages in the class action suits resulted from an ‘occurrence.’” The court later commented, “Other than the complaints and other court papers in the underlying lawsuits, and the policies of insurance, Behr has provided no evidence in support of this issue.”

As to the second issue, the court determined attorney fees were “damages” under the primary policies and not covered under the Allianz or Westchester policies. After the court denied Behr’s motion for new trial, it filed the underlying appeal.

II

Standard of Review

“The starting point for determining the extent of coverage provided an insured is ‘the particular language of the policies involved.’ [Citations.] In reviewing the policy language in question, we are not concerned with the interpretations which have been given that language by the trial court: ‘Where [as in this case] the underlying facts are not disputed, construction of an insurance policy presents a question of law. The appellate court is not bound by the trial court’s interpretation. Rather it must independently interpret the language of the insurance contract. [Citation.]’ [Citation.] Finally: ‘Words used in an insurance policy are to be interpreted according to the plain meaning which a layman would ordinarily attach to them. Courts will not adopt a strained or absurd interpretation in order to create an ambiguity where none exists.’ [Citation.]” (City of Laguna Beach v. Mead Reinsurance Corp. (1990)

226 Cal.App.3d 822, 830.)

III

Interpretation of the Insurance Policy

The language in the excess coverage policies is clear and unambiguous with respect to the extent of coverage provided. Both policies similarly defined “occurrence” as an “accident, including continuous or repeated exposure” to conditions that results in property damage “that is not expected or not intended” by Behr. “This is standard language throughout the insurance industry. [Citation.]” (Collin v. American Empire Ins. Co. (1994) 21 Cal.App.4th 787, 804.)

“Unless the term ‘accident’ is otherwise defined in the policy, it is given a commonsense interpretation: i.e., an ‘unintentional, unexpected, chance occurrence.’” (Modern Development Co. v. Navigators Ins. Co. (2003) 111 Cal.App.4th 932, 940,

fn. 4.) “‘Under California law, the term [accident] refers to the nature of the insured’s conduct, not his state of mind.’ [Citations.]” (Quan v. Truck Ins. Exchange (1998)

67 Cal.App.4th 583, 596.)

Accordingly, the test is not whether the complaint alleges negligence versus intentional torts.^[4] “‘[C]overage is not always precluded merely because the insured acted intentionally and the victim was injured. An accident, however, is never present when the insured performs a deliberate act unless some additional, unexpected, independent, and unforeseen happening occurs that produces the damage. [Citation.]’ [Citations.]” (Id. at p. 598, italics omitted; see also Hartford Fire Ins. Co. v. Karavan Enterprises, Inc. (1986) 659 F.Supp. 1075, 1077 [“Neither the intentional termination nor any unintended consequences of the termination constitute an ‘occurrence’”]; Royal Globe Ins. Co. v. Whitaker (1986) 181 Cal.App.3d 532, 537 [“[T]he definition of ‘accident’ halts any argument claiming the appellants’ assignor intended his act but not the resulting harm”].)

For example, in Hogan v. Midland National Ins. Co. (1970) 3 Cal.3d 553, 559, the insured sold a defective saw which cut lumber more narrowly than it should have. After discovering the defect, the purchaser intentionally cut wider lumber to compensate for the deficiency. The court held the damage caused from the “too-narrow” wood was a covered “accident,” but that deliberately cutting “over-wide” wood was not. (Id. at pp. 559-560.) Recovery was allowed only for losses incurred before discovery of the defect.

Chu v. Canadian Indemnity Company (1990) 224 Cal.App.3d 86 (Chu), is also instructive. That case involved an action by a condominium developer against its insurer for denying coverage of construction defect claims made by several of the homeowners. The insurer argued no coverage existed because the developer’s liability arose from intentionally selling units it knew suffered from defects causing the units to be uninhabitable and unsaleable. (Id. at p. 93.) However, the court’s summary judgment in favor of the insurer was reversed on appeal.

The Chu court reasoned insurance coverage could be denied only if the defect causing the postsale damage was known to the developer or its agents before the sale. However, the duty to defend and indemnify would not be barred merely because the developer “‘should have discovered’” the defect, but negligently failed to do so. The facts established the developer knew some of the construction defects before the sale, but it could not be assumed it knew all subsequent problems were “nothing more than a reoccurrence or further manifestation of the same defect . . . .” (Chu, supra,

224 Cal.App.3d. at p. 97, fn. omitted.) The court held, “[E]ach set of distinct defects must be analyzed separately to determine whether [the developer] had knowledge of those defects at the time they sold the units.” (Id. at p. 98.)

In light of the above, we conclude coverage under the excess policies can only be denied if the product defect was known before Behr advertised and sold it to customers. Coverage is not automatically forfeited if it “negligently failed to investigate and obtain actual knowledge of the existence of such defects.” (Chu, supra,

224 Cal.App.3d at p. 99.) An “occurrence” does not require a sudden event. However, there would be no coverage for loss occurring after Behr knew its product was defective, but continued to sell it.

IV

Behr’s Burden of Proof

The parties have different theories on the appropriate threshold burden of proof to trigger the indemnity provisions. As we will explain, both miss the mark.

On one hand, Behr asserts to meet its burden it only has to establish the settled lawsuit encompassed allegations of negligent conduct. Consequently, it believes the only relevant and necessary evidence from which to evaluate the issue of coverage are

the third party (class action) complaints and settlement agreements. It acknowledges many of the claims involved intentional torts, but because complaints contain negligence-type allegations, and damages were paid as a result of the settlement agreements, it has met its burden to trigger indemnity.

On the other hand, the insurers maintain Behr has confused the duty to defend with the duty to indemnify. To trigger indemnity, the insurers contend Behr must prove the damages are actually covered under the policy, which cannot be established by merely evaluating allegations listed in the complaints and settlement documents. At oral argument, the insurers suggested the trial court was required to use the preponderance of the evidence standard when evaluating the issue of coverage for settled claims. The insurers point to the class certification orders and the Smith court’s findings of fact and conclusions of law as providing sufficient evidence to support the court’s ruling, i.e., Behr manufactured, warranted, advertised, and sold products it knew were inherently defective, and therefore, its settlement was for damages which did not arise out of the covered negligence-type causes of action.

“It is well settled that the duty to defend is broader than the obligation to indemnify, from which it must be distinguished. The courts have imposed a duty to defend whenever an insurer ascertains facts which give rise to the possibility or the potential of liability to indemnify. Unlike the obligation to indemnify, which is only determined when the insured’s underlying liability is established, the duty to defend must be assessed at the very outset of a case. An insurer may have a duty to defend even when it ultimately has no obligation to indemnify, either because no damages are awarded in the underlying action against the insured or because the actual judgment is for damages not covered under the policy. [Citiations.]” (Borg v. Transamerica Ins. Co.

(1996) 47 Cal.App.4th 448, 454-455.)

When an action goes to trial, “the indemnity claim must be reduced to a judgment, which requires an adjudication of the precise amount of the damages claimed. The cause of the damages must be adjudicated in order to establish whether or not the claim is under the coverage. The burden of proof to support these adjudications is on the plaintiff.” (Golden Eagle Refinery Co. v. Associated Internat. Ins. Co. (2001)

85 Cal.App.4th 1300, 1313.) “[W]here both covered and not covered events cause damages a failure to differentiate and allocate is fatal to a claim for indemnity.”

(Id. at p. 1314.)

“In cases where a settlement is involved, [there is a concern] that the settlement was entered into in order to obtain insurance coverage for an otherwise uninsurable claim . . . . There is also a contrary, though not mutually exclusive, concern that an insured will be deterred from entering into a settlement agreement when it would have to offer full proof that property damage existed in the coverage action when that proof has not yet been established in the underlying action. Courts have addressed these competing concerns by crafting the general rule that if an insured settles an underlying claim prior to verdict, it must show that it settled an otherwise covered loss in ‘reasonable anticipation of liability.’ [Citation.] As the Second Circuit explained in Luria Brothers & Co. v. Alliance Assurance Co. (2d Cir.1986) 780 F.2d 1082, [1091,] in order to recover a settlement, the ‘insured need not establish actual liability to the party with whom it has settled “so long as a potential liability on the facts known to the [insured is] shown to exist, culminating in an amount reasonable in view of the size of possible recovery and degree of probability of claimant’s success against the [insured].’ [Citation.]” (U.S. Gypsum Co. v. Admiral Ins. Co. (Ill.App. 1994) 643 N.E.2d 1226, 1244 (Gypsum).)

In light of the above persuasive authority, we conclude, Behr had the burden of proving it had a “reasonable anticipation” of liability on a covered loss when it settled the underlying class actions. And because both covered and noncovered claims were alleged in the class actions, Behr’s claim for indemnity required a showing it was aware of facts that would reasonably lead it to anticipate the loss arose out an “occurrence” or “accident” within the meaning of the policy. Evidence tending to show the mere possibility of coverage will not win the day.

V

Behr’s Evidence

We begin by noting we agree with Behr’s contention it was not required to provide conclusive evidence of liability in order to obtain coverage for reasonably settled claims. (Citing Isaacson v. California Insurance Guarantee Assn. (1988) 44 Cal.3d 775 (Isaacson); Armstrong World Indus., Inc. v. Aetna Casualty & Surety Co. (1996)

45 Cal.App.4th 1, 86-87, fn. 37 (Armstrong); Pruyn v. Agricultural Ins. Co. (1995)

36 Cal.App.4th 500, 527-529 (Pruyn).) As explained above, Behr only had the burden of proving “it settled an otherwise covered loss in ‘reasonable anticipation of liability.’” (Gypsum, supra, 643 N.E.2d at p. 1244.) It need not undergo the expense of a trial to prove its own liability.

Behr asserts, “[T]he underlying settlements themselves are presumptive evidence of liability and a sufficient basis for the insured to obtain insurance.” We disagree. This evidentiary presumption ordinarily applies when “an insurer wrongfully fails to provide coverage or a defense, and the insured then settles the claim . . . .” (Isaacson, supra, 44 Cal.3d at p. 791.) We found no cases suggesting this is the evidentiary presumption to be automatically applied in the context of excess insurance policies. Nor logically should such a presumption apply in light of the sound reasoning set forth by the court in Gypsum, i.e., courts should not ignore the competing concerns of the insurer potentially paying noncovered claims and the public policy of encouraging settlements.

After reviewing Isaacson, Armstrong, and Pruyn, the case authority discussing the evidentiary presumption, we conclude they are not sufficiently analogous to be controlling here. Whether the insured is liable is a different issue from whether the loss is covered. (Fuller-Austin Insulation Co. v. Highlands Ins. Co. (2006) 135 Cal.App.4th 958, 1003-1004.) The presumption discussed in Isaacson, Armstrong, and Pruyn cannot be construed as a presumption of liability as well as liability falling within coverage. (Ibid.) Even in cases where the insurer has erroneously denied coverage, “the initial burden of establishing harm within coverage falls on the insured, not the insurer.” (Ibid.) Moreover, Behr’s complaint sought only declaratory relief. The excess insurers should not be burdened with any presumptions when it has not been alleged they wrongfully breached the contracts.

Consequently, we reject Behr’s contention the settlements alone provided sufficient evidence the loss must be covered. Absent the evidentiary presumption, the settlement documents merely restate the allegations of the complaint. There are no admissions of fault. We were unable to find any statements or facts from which one could reasonably infer Behr anticipated liability on covered, as opposed to, noncovered claims.

Alternatively, Behr asserts evidence of the class-action complaints was sufficient to meet its threshold burden of proof. We disagree. Certainly, the complaints established there were allegations of “accidental conduct” potentially covered by the policy. But, the insurer’s coverage duties are not defined by “the label chosen by the pleader. [Citation.]” (Uhrich v. State Farm Fire & Casualty Co. (2003) 109 Cal.App.4th 598 [facts extrinsic to the complaint can defeat duty to defend coverage].) Mere

pleadings and allegations cannot invoke coverage without other supporting evidence or facts to reasonably address concerns that “the settlement was entered into in order to obtain insurance coverage for an otherwise uninsurable claim[.]” (Gypsum, supra,

643 N.E.2d at p. 1244.) Behr needed to supply evidence (perhaps with a declaration or a corporate generated document) indicating it expected its product warranties and representations were good and the failure was unexpected.

Finally, as noted by the trial court, there was evidence in the record which undermined Behr’s claim for coverage. For example, the settlement notice to the class described the litigation concerning Behr’s fraudulent concealment of defective products, which suggests Behr expected the resulting property damage. It certainly does not support the notion Behr anticipated liability for covered claims when it settled the lawsuit.

Accordingly, we need not resolve in this opinion whether the trial court could also rely on the vacated findings of fact and conclusions of law in the Smith class action. We recognize the parties strongly dispute this issue. However, the court noted in its statement of decision, “Even if the [vacated ruling] was inadmissible, the court’s conclusion would be the same as herein stated.” The court discussed other evidence to support its ruling, and in light of our deferential standard of review, we must affirm.

VI

Attorney Fees

Behr argues that if the indemnity clauses were triggered, Westchester and Allianz must also cover the amounts paid to class counsel. Behr notes the trial court correctly determined the attorney fees would be covered “damages” under the policies at issue, if there was a duty to indemnify. In light of our ruling Behr failed satisfy its burden of proof of showing a covered “occurrence” to trigger the indemnity clause, we affirm the court’s determination Behr is not entitled to coverage for attorney fees paid to class counsel.

VII

Disposition

The judgment is affirmed. Respondents shall recover their costs on appeal.

O’LEARY, J.

WE CONCUR:

BEDSWORTH, ACTING P. J.

IKOLA, J.

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^[1] Westchester issued the policy as agent for Fremont Industrial Indemnity Company f/k/a Industrial Indemnity Insurance Company. For clarity and convenience these entities will be referred to collectively and in the singular as Westchester.

^[2] Allianz Global Risks U.S. Insurance Company f/k/a Allianz Insurance Company will be referred to collectively and in the singular as Allianz.

^[3] An excess insurance policy serves a different purpose than a primary policy. Whereas primary coverage generally provides immediate coverage upon the occurrence of a loss or event giving rise to liability, “‘[e]xcess insurance provides coverage after other identified insurance is no longer on the risk. “Excess” coverage means “coverage whereby, under the terms of the policy, liability attaches only after a predetermined amount of primary coverage has been exhausted.”’ [Citation.]” (Pacific Indemnity Co. v. Bellefonte Ins. Co. (2000) 80 Cal.App.4th 1226, 1235, italics omitted.)

^[4] This answers Behr repetitious argument that breach of implied warranty is necessarily covered because the claim does not include an element of intent. Under California law, a breach of warranty is not always an “accident” in the context of insurance coverage claims.